Is Pandora Immortal?

With shares of Pandora Media (NYSE:P) trading at around $12.11, is P an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

If you’re reading this article, then there’s a good chance you have visited Pandora.com at least once. There’s an even better chance that you visit regularly. However, in the event that you don’t know or understand Pandora, it’s a place to listen to music. Of course, there are many places where you can listen to music online. What makes Pandora.com different is that it uses a sophisticated algorithm to create a radio station for you based on your tastes. For example, if you type in U2, then you might hear “Sunday Bloody Sunday” followed by a song from a different artist. Once recent example of a U2 Radio list (8 songs/artist only) is U2/Coldplay/Goo Goo Dolls/The Police/U2/Coldplay/The Cranberries/The Police. As you can see, there are a few repeats in there. This type of set-up obviously works for a lot of people considering there were 150 million users in 2012. But it’s not a good fit for everyone. Let’s get to the user situation before looking at other aspects of the business, the most important aspect being competition.

You can use Pandora for free and listen to millions of songs, but you will have to deal with large and annoying ads on the page. Then again, some people simply minimize the page and listen to the music while doing something else online, which makes the ads irrelevant. On the other hand, advertisers wouldn’t be happy to know this. If you don’t want to deal with ads, then you can pay $36 per year or $3.99 per month for Pandora One. Other benefits to upgrading to Pandora One include higher quality audio, a desktop application, custom skins (customize the look of Pandora,) and fewer interruptions (up to five hours.)

Before we get to the competition, it’s important to understand where Pandora stands on a traffic level. According to Alexa.com, Pandora.com is currently ranked 283 in the world. This means it’s the 283rd most popular site in the world, which is impressive. Pandora.com is ranked 59 in the United States – also impressive. Over the past three months, pageviews-per-user has increased 1.6 percent, bounce rate has decreased 2 percent (this is good – bounce rate is how many people visit one page and leave,) time-on-site has increased 2 percent, and search has increased 10 percent. Overall, the past three months have shown solid growth.

One of the smaller threats for Pandora is Spotify.com. Though small, it’s up and coming with authority. According to Alexa, it’s ranked 1211 in the world and 721 in the United States. Over the past three months, pageviews-per-user has increased 12.7 percent, bounce rate has decreased 16 percent, and time-on-site has increased 9 percent. You can listen to music for free on your desktop or laptop, but you will also have to deal with ads. If you choose the Unlimited package for $4.99 per month, you can listen to music from your desktop or laptop and not have to deal with ads. If you choose the Premium package for $9.99 per month, you can listen to music from all devices and you won’t have to deal with ads.

Apple Inc. (NASDAQ:AAPL) and Sirius XM Radio Inc. (NASDAQ:SIRI) are the most obvious threats to Pandora. But there is also one other option out there for music lovers. Google Inc.’s (NASDAQ:GOOG) YouTube.com might not be known as a place to go to listen to popular music, but it’s actually one of the simplest and most enjoyable options. Instead of a radio station, you can simply type in an album you would like to listen to, press play, and enjoy. For example, you can type in YouTube’s search box: “Pink Floyd The Wall Full Album” and you will have the whole album right there. Hit play, sit back, and enjoy the music. Even if you don’t know the names of the albums for a particular artist, you can simply type in the artist’s name and the words “Full Album.” For example, you would type in: “Pink Floyd Full Album.” You would then see a list of albums for Pink Floyd. Another cool aspect is that you can interact with fellow fans of the artist in the comments below. That said, Pandora also has an impressive social community. It really comes down to what you’re looking for – a radio station that uses and algorithm based on your interests or a full album.

Competition is the biggest issue for Pandora. And it didn’t help that Pandora removed its app from Facebook (NASDAQ:FB). However, it was the right move. Pandora took a strong stance that their users shouldn’t be susceptible to Facebook’s auto-publish feature, which allows your friends to see everything you have listened to. Many people would prefer to keep that private. If you’re a 25-year-old male listening to Debbie Gibson, do you really want people to know about it? Probably not.

Aside from competition, one of the biggest potential problems for Pandora is that 88 percent of its revenue comes from ads. This monetization method hasn’t had a good track record. Then there are content acquisition costs, which represent 50 percent of total costs. As long as these costs remain high, there won’t be much room to maneuver when it comes to the goal of sustained profitability.

Now let’s take a look at some important numbers prior to forming an opinion on this stock.